Bank of the West pays up for AAA on its next auto ABS
Bank of the West's next securitization of prime loans financing new-and-used autos may have better credit characteristics than its previous transaction, completed last year.
But the San Francisco-based institution is still paying a price for the below-average performance of that prior transaction, as well as for its relatively light resume in this market.
It had to pay up for a triple-A on the $750 million Bank of the West Auto Trust (BWSTA) 2018-1 from Moody’s Investors Service and S&P Global Ratings. The senior tranches benefit from 7.9% credit enhancement, versus just 5.85% for the comparable tranches of the previous deal.
Both S&P and Moody’s cite stated higher-than-expected losses on Bank of the West’s 2017-1 transaction as cause for concern. In addition, Moody’s reported, the bank’s “limited history of securitization portfolio performance introduces uncertainty in dimensioning the expected performance of BWSTA 2018-1.”
Among the credit strengths in the new deal is the highest-ever seasoning (23 months) and new-car ratio (54%) on the platform’s short history.
The transaction features three classes of AAA-rated term notes: a $218.5 million Class A-2 tranche due April 2021, a Class A-3 issue with a final legal maturity December 2022 also sized at $218.5 million, and a Class A-4 tranche of $80.62 million in notes due December 2023. The trust is also issuing a money-market class of notes sized at $175 million, rated P-1 by Moody’s and A-1+ by S&P.
Less than 4% of the assets are in three classes of subordinate notes that carry investment grade ratings between Aa3, A3 and Baa3 (equivalent of triple-B) from Moody’s and AA+, AA- and A from S&P.
The collateral pool consists of 40,038 receivables with a relatively low remaining balance of $18,733 per account, due to the advanced seasoning (last year's deal had a WA age of 5 months). The portfolio also includes an average interest rate of 4.92% and a weighted average original term of 76.6 months (an all-time high for the platform).
The WA FICO of 748 is slightly above the 745 from BWSTA 2017-1 portfolio, but below that of Bank of the West’s 2014 and 2015 transactions that had much higher average FICOs of 777 and 774, respectively.
Those 2014 and 2015 pools were buoyed by a managed portfolio that in 2013-2015 had delinquencies between 0.45% and 0.82%, and net losses ranging from 0.1% to 0.2%. Net losses built slightly to 0.42% in 2016 and 0.67% in 2017.
Since 2016, according to S&P, Bank of the West (which is owned by BNP Paribas) has been improving underwriting while downsizing its portfolio of indirect auto receivables to $3.615 billion, a decrease from $4.237 billion last year. The smaller portfolio is “driven by a change in origination strategy to focus on risk-adjusted margin over volume,” S&P noted.
Bank of the West underwrites and acquires loans from a network of 2,350 franchise vehicle dealers in 31 states – although nearly 22% of the 2018-1 pool remains concentrated in California.
About 54% of the originations in the 2018-1 pool were made between 2012 and 2016, with 25% of the loans in the pool issued in 2018. Because of the extended seasoning, contracts with remaining terms greater than 60 months decreased to 39.9% of the pool from 89.7% in 2017-1, and those with remaining terms greater than 72 months decreased to 17.3% from 42.6% in the prior transaction.
Despite improved credit quality, S&P has an expected net loss range of 1.5%-1.7%, compared to the expected loss of 1.45%-1.65% in the 2017-1 pool.
Moody’s has a projected net loss of 1.75%, compared to its 2% forecast for BWSTA 2017-1 last year.